Manufacturers face cost pressure - and consumers pay price

In its latest SME trends survey, the CBI today warns that hundreds of small and medium-sized manufacturers are feeling the heat from rising oil and commodity prices.

While order volumes were found to be growing at the fastest rate in 16 years, thanks to strong demand both at home and abroad, the business body described inflationary pressures as "a dark cloud".

It said soaring input costs were eating into profit margins, forcing manufacturers to raise their output prices, with more pain to come.

The survey sends a fresh warning shot across the Bank of England's bows as it wrestles with the twin challenges of lacklustre economic recovery and persistently high inflation. Most commentators, though, still expect the bank's monetary policy committee to leave interest rates unchanged at this week's monthly meeting.

On a bright note, today's quarterly CBI report shows volumes of domestic and export orders among smaller firms rising at the sharpest pace since April 1995.

Of the 400-plus respondents, 39 per cent reported a rise in domestic orders in the past three months, with 23 per cent noting a fall, giving a positive balance of 16 per cent. On the export front, the balance was even stronger at +23 per cent.

Buoyant demand and stock rebuilding meant that the balance of firms saying production rose jumped to +18 per cent from +13 per cent in the previous quarter.

With orders flooding in and output on the rise, businesses increased their headcounts at the fastest rate since the start of 1995.

Lucy Armstrong, chair of the CBI's SME council, said: "Smaller manufacturers are enjoying strong demand for goods at home and abroad, underpinning robust growth in production.

"Headcount has increased for the third consecutive quarter as firms try to keep up with demand, and output is expected to rise again in the coming months."

But the survey found that a balance of +53 per cent of firms suffered a rise in average unit costs - the highest reading since October 2008.The rate of growth has accelerated over the past year as companies struggle with the soaring cost of oil.

As a result, domestic prices increased at a 16-year record rate while the cost of exported goods rose at the fastest pace since the survey began in October 1988.

Armstrong added: "Inflationary pressures remain a dark cloud, with rising oil and commodity prices pushing up the cost of production and eating into profit margins.

"Manufacturers have raised output prices rapidly to cope, and expect to continue doing so over the next quarter."

The poll was conducted between 23 March and 11 April, during which time a barrel of Brent crude oil averaged $119.06, compared with just over $93 in January's survey.

Last week, CBI Scotland said the country's manufacturing sector continued to ride a high with firms enjoying further upturns in domestic and export orders, although it too warned that soaring costs were starting to bite.

• The eurozone's manufacturing sector kept its foot firmly on the accelerator last month and factories continued to ramp up their prices, a survey yesterday revealed.

The Markit eurozone manufacturing purchasing managers' index rose to 58 from March's 57.5. The index hit a near-11 year high of 59 in February.